Economic growth is poised to finish the year strongly with global inflation remaining somewhat tepid.
We remain resolute in our belief that global gross domestic product (GDP) is on track for a 3.7% growth rate
in 2018, taking into account some minor downward revisions to our forecast because of isolated emerging
Recap of key economies
Buoyed by reduced tax rates, continued deregulation and
higher government spending, U.S. GDP growth appears to
be the safe haven on the global economic stage. Domestic
capital expenditures (capex) continue to be strong and small
business confidence is at an all-time high. In addition,
consumer spending has held up well despite higher gasoline
prices. We believe the U.S. growth rate will average around
3% annualized in 2018.
The deterioration in eurozone economic data seems to
be waning following an agreement between the U.S. and
European Union (EU) to discuss a reduction in tariffs on
industrial goods. Brexit negotiations between the U.K. and
EU continue to be choppy, which has caused some delays
in anticipated capex spending for the eurozone. While we
believe the two parties will come to a resolution for the
U.K.’s exit from the EU prior to the March 2019 deadline,
the ongoing negotiations may cause lingering economic
tumult until a deal can be reached. We continue to expect
GDP growth at an average annual rate around 2% in 2018.
While the European Central Bank reduced the amount of its
asset purchases during the third quarter, it has committed
to keeping rates low for an extended period. We think that
decision is likely to continue to support the EU economy. In
addition, the Bank of England recently raised interest rates
and we think it is set to continue increasing rates gradually,
barring any unforeseen Brexit issues.
The focus of late has been on emerging markets. China’s
economy has been weaker because of a combination of
deleveraging and new pollution controls on industries there.
These factors, coupled with concerns about an escalating
trade war with the U.S., have pushed China’s policymakers
to begin to ease policy. We believe recent announcements of
tax cuts and increased infrastructure spending in addition
to lower interest rates will stabilize China’s economy during
the fourth quarter.
Currency crises plagued Turkey and Argentina throughout
the third quarter, which sent tremors through other emerging
market economies, including South Africa. Emerging markets
continue to face headwinds from the international trade
uncertainty and a strong U.S. dollar. We believe emerging
markets continue to offer sound investing fundamentals;
however, market volatility is likely to persist until there is
more clarity on the risks.
Steady global GDP growth
Source: 2017, International Monetary Fund actual data; 2018, Ivy forecast
A shift in U.S. monetary policy?
As widely expected, the U.S. Federal Reserve (Fed) in September
increased the benchmark federal funds interest rate by 0.25
percentage point to a range of 2.00–2.25%. We anticipate the
Fed will raise rates again in December with the possibility of up
to two rate hikes in 2019, based on its forward guidance.
Another noteworthy outcome from the September Fed
meeting was the elimination of its longstanding reference to
“accommodative” monetary policy. We believe this implies
the Fed is comfortable with the recent rate increases and
those planned over the next 12 months, given that financial
conditions continue to support economic growth.
Possible progress on trade
Trade continues to be our main concern as the Trump
administration places great emphasis on U.S. trading
relationships, but to mixed reviews. China remains the primary
focus of President Donald Trump’s protectionist trade policy.
To date, the U.S. has levied tariffs on $250 billion worth of
Chinese goods — or approximately one-half of the goods
imported from China — with threats of more to follow. Despite
the continued verbal saber-rattling from both countries, we still
believe an all-out trade war can be avoided, especially if China
grants greater market access to the U.S. and addresses the
administration’s concerns over intellectual property.
After months of sometimes highly contentious negotiations, the
U.S. reached a deal with Mexico and Canada designed to replace
the North American Free Trade Agreement. Highlights of the
new pact, known as the United States Mexico Canada Agreement
(USMCA), include changes to the rules on auto manufacturing
as well as access to the Canadian market for U.S. dairy farmers.
The USMCA must now go through U.S. Congressional approval,
where confirmation could be lengthy, but looks likely as there are provisions both Republicans and Democrats can support.
Despite the ongoing global trade tensions and other geopolitical
concerns, investors appear to have adjusted to the volatility of the
current market environment. The S&P 500 Index, which ended
the third quarter with its best quarterly performance in five years,
posted positive gains for six months straight between April and
September. This marks only the sixth time since 1928 that the
index scored such a streak for that time period.
With economic growth on track, it appears that market gains,
robust corporate earnings and a strong job reports are offsetting
concerns of a global trade war. However, we continue to worry
that an escalating and ongoing trade conflict with China could
dampen business confidence, stunting both U.S. and global
economic growth. If the trade conflict spreads to other countries,
the damage could be amplified.
Ivy Live: 2019 Global Outlook – Does the run end?
Thursday December 20, 2018
1 CE credit offered during live event for CFP/CIMA
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